Question

Suppose Marv, the owner-manager of Marv’s Hot Dogs, earned $170,000 in revenue last year. Marv’s explicit costs of operation totaled $130,000. Marv has a Bachelor of Science degree in mechanical engineering and could be earning $60,000 annually as mechanical engineer.

a.        Marv's implicit cost of using owner-supplied resources is $___                           __.

b.       Marv’s accounting profit is $_____           _______.  

c.         Marv's economic profit is $__                         _____.

Answer 1

a. Implicit cost = $60,000

Explanation: Implicit cost refers to the opportunity cost i.e. the benefits forgone in order to choose another alternative. Marv had to forego the $60,000 annual salary as a mechanical engineer by choosing to sell hot dogs. Therefore, here the opportunity cost or the implicit cost is $60,000.

b. Accounting profit = Revenue - Explicit costs = $170,000 -  $130,000 = $40,000.

Explanation: Accounting profit does not take implicit costs into consideration.

c. Economic profit = Accounting profit - Implicit costs = $40,000 - $60,000 = -$20,000

Explanation: Economic profit takes both implicit and explicit costs into consideration. So, economic profit = accounting profits - implicit costs.